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Central Bank Policy Rate Guidance and Financial Market Functioning

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  • Richhild Moessner

    (Bank for International Settlements)

  • William R. Nelson

    (Federal Reserve Board)

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    Abstract

    Several central bankers have expressed concern that providing forecasts of future policy rates may impair financial-market functioning.We look for evidence of such impairment by examining the behavior of financial markets in the United States, the euro area, and New Zealand in light of the communication strategies of the central banks. While we find evidence that central bank policy rate forecasts influence market prices in New Zealand, we find no evidence that market participants in the three regions systematically overweight policy rate guidance or that they do not appreciate the uncertainty and conditionality of it. The results suggest that the risk of impairing market functioning is not a strong argument against central banks’ provision of policy rate guidance or forecasts.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 4 (2008)
    Issue (Month): 4 (December)
    Pages: 193-226

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    Handle: RePEc:ijc:ijcjou:y:2008:q:4:a:6

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    References

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    1. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Working Papers 01-5, Bank of Canada.
    2. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
    3. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 0354, European Central Bank.
    4. Aron Drew & Özer Karagedikli, 2007. "Some Benefits of Monetary-Policy Transparency in New Zealand," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(11-12), pages 521-539, December.
    5. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
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    Cited by:
    1. Gunda-Alexandra Detmers & Dieter Nautz, 2014. "Stale Forward Guidance," SFB 649 Discussion Papers SFB649DP2014-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    2. Hughes Hallett, Andrew & Di Bartolomeo, Giovanni & Acocella, Nicola, 2012. "A general theory of controllability and expectations anchoring for small-open economies," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 397-411.
    3. Beechey, Meredith & Österholm, Pär, 2012. "Policy Interest-Rate Expectations in Sweden: A Forecast Evaluation," Working Paper 127, National Institute of Economic Research.
    4. Moessner, Richhild, 2013. "Effects of explicit FOMC policy rate guidance on interest rate expectations," Economics Letters, Elsevier, vol. 121(2), pages 170-173.
    5. Lars Winkelmann, 2013. "Quantitative forward guidance and the predictability of monetary policy - A wavelet based jump detection approach -," SFB 649 Discussion Papers SFB649DP2013-016, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    6. Richhild Moessner & Jakob de Haan & David-Jan Jansen, 2014. "The effect of the zero lower bound, forward guidance and unconventional monetary policy on interest rate sensitivity to economic news in Sweden," DNB Working Papers 413, Netherlands Central Bank, Research Department.
    7. Detmers, Gunda-Alexandra & Nautz, Dieter, 2013. "How Stale Central Bank Interest Rate Projections Affect Interest Rate Uncertainty," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79861, Verein für Socialpolitik / German Economic Association.
    8. Richhild Moessner, 2014. "International spillovers from US forward guidance to equity markets," DNB Working Papers 427, Netherlands Central Bank, Research Department.
    9. Matthew D. Raskin, 2013. "The effects of the Federal Reserve's date-based forward guidance," Finance and Economics Discussion Series 2013-37, Board of Governors of the Federal Reserve System (U.S.).

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